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Trader Tax Advantages and How You Can Get Them

Trader Tax Advantages and How You Can Get Them

If you are a full-time Forex trader, there are several significant tax benefits for those who are not available to more informal market participants. The bad news is that it is quite difficult to qualify for them. But we will get there in a moment. Why is it an excellent idea to be eligible as a "trader" for federal income tax purposes?

First of all, you can deduce a lot more. If you are a full-time trader, rather than a gardening investor, you can list the deductions in Table C. In essence, the IRS accounts for all business expenses as business expenses. All other users must use Schedule A. This difference saves most of the changes made to a merchant when they file an income tax.

Advantage of Schedule C

Usually, individual investors must deduct business expenses and investment expenses from Schedule A of their personal tax returns. The IRS treats them as various itemized deductions and, as such, is generally subject to a 2% limit of the appropriate gross income before becoming tax-deductible. This means that if an investor has an annual salary of $ 100,000 and a business expense of $ 5,000, he can only deduct $ 3,000 (assuming no other detailed deductions).

A trader in the same situation, but qualified for his tax situation, list the expenses of the business in Table C, net profit. The Schedule C expenses are not subjected to the 2% limit that applies to various detailed costs so that the operator can deduct all of the $ 5,000. The same agreement applies to interest expense if any. This is important for foreign exchange traders and commodities, which are generally in debt and can, therefore, have high-interest rates. Traders may deduct each cent of interest from their Schedule C, where individual investors are required to report the interest rates on the modified deduction investments in Schedule A. (Note: Commissions and other costs of buying or selling securities should be deductible, but should be used to calculate profits or losses). This problem has become more pronounced since 2013, the "Pease limitation" limiting the amount of the various itemized deductions you can receive if your income exceeds $ 250,000 (single) or $ 300,000 (married), make a joint statement. Also, although investors can only deduct interest from the value of investment income, traders do not have this limit. If interest expense exceeds investment income, traders may deduct any residual amount from ordinary income. This is true even if interest expense exceeds the investment income of more than $ 3,000.

Section 475 MTM (Mark-to-Market)

This is a significant tax advantage for qualified traders, which is not available to ordinary investors. The IRS allows persons who qualify as traders to select securities and contracts as well as mark-to-market (MTM) accounting in Article 1256. The rules are set out in Article 475 of the rules of the Internal Revenue Code. The rule allows you to process any amount covered (except inventory, which does not apply to most individual traders) as if you were selling it at fair market value at the end of the year. Therefore, it is not necessary to sell anything to account for a taxable loss or gain. Profits are treated as ordinary income and losses as ordinary losses. It is better to have regular losses than capital losses because you can use them to counteract all kinds of income, including capital gains, ordinary income,  portfolio and interest income, and passive income.

On the contrary, as a general rule, any investor in a contract under section 1256 must accept the tax rules applicable to capital gains. 

Minimum replacement tax

If the alternative minimum tax applies to you, most of your investment expenses will be "refunded" or denied according to the AMT. However, this is not the case if you are qualified as a trader per the rules of the IRS. Your expenses are considered business expenses deductible per any set of tax regulations. Unlike financial traders, investors should include capital gains and losses in Schedule D.

Am I eligible for Trader status?

Although the tax benefits of trading status are essential, it is not easy to qualify for it. According to the IRS,

  • You should try to take advantage of the daily movements of the bond market rather than dividends, interest or capital appreciation;
  • Your business must be substantial 
  • The activity must be continuous and regular.

Congress has left a lot of room for maneuver because each of these regimes is very subjective. The law has never explicitly defined the terms "substantial" and "with continuity and regularity," nor has it given much value to the Merchant Congress Refuge. Therefore, when the law does not provide much guidance, we should be inspired by actual actions, regulations, and case law in a recent case of the US tax court. 

So what do you have to do?

In light of precedents established in case law and private letter judgments, the real criteria for registering as a trader for tax purposes are:

  • Trade full-time or part-time 24/7.
  • At least 4 hours per day of work on average in your company.
  • There is no real mistake in the activity. Exchange all year as if you were working full time.
  • Redeem 75% or more of the available trading days.
  • You must do 1,000 or more transactions each year.
  • Most transactions should be done daily or through negotiations.
  • Your stated intention should be to make a living as a trader.
  • You have spent massively on tools, software, education, etc.
  • Have a home office or office space dedicated to the school.
  • The size of your account must be large compared to the total resources.

Algorithmic exchanges are of little importance. You must be the trigger. Also, your revenue model must be based on frequent purchases and sales of profits. The longer you rely on long-term ownership, interest, and dividend income, and the capital gains you try to manage under capital gains tax rules, the more questionable your trader status.

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